Health Care: Taxing That Fella Behind the Tree, Again

The House leadership seems convinced that a relative handful of people should pay for health reform. In the plan released yesterday by Speaker Nancy Pelosi, Democrats would fund most of the cost of insuring millions more people in two ways: cutting subsidies to Medicare Advantage plans and imposing a stiff 5.4 percent surtax on individuals making $500,000 and couples making more than $1 million.

TPC figures that just 400,000 taxpayers will pay that increase in 2011, less than three-tenths of one percent of all taxpayers. However, because the millionaire’s surtax is not adjusted for inflation (at least not yet), within a decade many more are scheduled to fall victim to the tax hike. By 2019, TPC figures nearly 800,000 would be in the bulls-eye, although that is still fewer than 1 percent of all taxpayers. Over the decade, the surtax is projected to raise nearly a half-trillion dollars. But because income subject to the surtax does not increase with inflation, annual tax revenues would grow from about $30 billion in 2011 to $70 billion in 2019

I am bothered by two elements of this. First, do we really want to put most of the cost of a national priority such as health care on the backs of a relatively few people? My concern has more to do with our social compact than economics, but wouldn’t it make more sense if we all had a horse in this race? I know, those hit by the surtax are the same people who benefitted most from the Bush tax cuts in 2001 and 2003. But there is still something wrong with pretending that health reform is a free lunch for 99.7 percent of us.

And I have another problem. My guess is the levy would become another Alternative Minimum Tax deal. That is, despite what looks like surtax-creep, there is a pretty good chance Congress would get cold feet somewhere along the way and protect many of those who would otherwise face the extra tax over the next decade. This would add tens of billions more to the deficit.

I can hear lawmakers now. “This tax was never intended to hit these hard-working Americans earning just $500,000,” some pol will thunder in the run up to the 2014 elections. And on some level, I fear, that will be quite right.

By the conventions of budget scoring, of course, it doesn’t matter if many never pay the tax. The scorekeepers (JCT in this case) must assume the law will apply for 10 years. So, if this provision survives the next few months of congressional debate, Congress will be able to give itself credit for paying for health reform, never mind that would do so in a way that is irresponsible and very likely phony.

Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.